In the Name of Allāh,

the Entirely Merciful, the Especially Merciful

Praise is due to Allāh, Lord of the worlds, may the blessings and peace be upon our master Muḥammad, the last of prophets, on his family, and all his companions.

Resolution No. 212 (8/22)

Bank Guarantee for Misinvestment of Clients Funds and Compensation for the Consequent Losses

The Council of the International Islamic Fiqh Academy of the Organization of Islamic Cooperation, holding its 22nd session in Kuwait City, State of Kuwait, on 2–5 Jumādā al-Ākhirah 1436h (22–25 March 2015),

Having examined the research papers submitted to the Academy concern- ing Bank Guarantee for Misinvestment of Clients Funds and Compensation for the Consequent Losses,

Having listened to the in-depth discussions on the subject,

Resolves

First: Bank guarantee means that the bank bears the total or partial loss of depositors and owners of investment accounts’ funds.

Second: Description of the Bank’s Hold on Deposited Funds in the Two Following Forms:

1. Holding under Guarantee: which means holding the funds as an own- er, or to its own benefit as a holder, such as: holding by the purchaser, or recipient of the purchase price; or holding by the mortgagee, extorter, owner and borrower. Bank accounts that fall under guarantee holding are demand deposits (current accounts). In this regard, the Council re- iterates what was stated about deposits in its resolution no. 86 (9/3), Clause (First) that “Demand (current) deposits with Islamic banks are loans in the Fiqh perspective, because the receiving bank holds them under guarantee, and is committed, according to Shariah, to repay them on ”
2. Holding under Trusteeship: which means holding the funds on behalf of rather than in the capacity of an owner. Holding of the funds, in this case, is permitted by the owner, and it includes holding of the: deposit keeper, lessee, partner, Muḍārabah worker, Waqf supervisor, guardian and the like. Islamic Bank accounts that fall under this type of holding are investments In this connection, the Council reconfirms what

has been stated in Clause (Second (b)) of its resolution referred to in point (1) above“Deposits delivered to banks that are committed to rules of Shariah, based on an investment contract and for a profit share, are Muḍārabah capital and subject to Muḍārabah (qirad) rulings in Islamic Fiqh, which include – among others – impermissibility of guaranteeing Muḍārabah capital by the Muḍārabah worker/muḍārib(the bank inthis case).”

Third: It is not permissible for the bank, when assuming the role of the muḍārib, to guarantee total or partial loss of investment accounts, except in case of transgression negligence or breach of contract, as indicated by the general rules of Shariah. Among cases of transgression are the following:

1. Noncompliance of the bank with Shariah criteria stipulated in contracts and agreements of opening investment accounts in all their different
2. Violation of banking and commercial regulations, laws, or practices is- sued by supervisory bodies responsible for regulating banking business, unless such regulations, laws, and practices contradict the rules and prin- ciples of Shariah.
3. Slackness in preparation of adequate feasibility studies for investment
4. Selection of the wrong operational modes and
5. Failure of complinance with the bank’s internal directives and operational
6. Failure to obtain sufficient collaterals, as per normal practice in the

Fourth: It is not permissible to stipulate a guarantee by the bank as a muḍārib because such stipulation contradicts the essence of the Muḍārabah con- tract. Therefore the Council reconfirms what has been stated in its resolutions no. 86 and no. 30 (5/4) on Muqāraḍah Bonds, which indicates that “It is not permissible for Muqāraḍah Ṣukūk or prospectus to include any text indicating that Muḍārabah working party is to guarantee the capital or any lump sum or percentage return on capital. When such stipulation is implicitly or explicitly introduced the guarantee becomes invalid, and the muḍārib becomes entitled to a profit of similar Muḍārabah transactions.”

Fifth: In a legal suit of loss, the burden of proof shifts – contrary to the case in principle – to the bank, provided that there is evidence contradicting with

the bank’s claim of not committing transgression. Among the factors that sup- port resorting to this procedure (shifting the burden of proof) are the following:

1. If it is a common practice not to accept such claim of the muḍārib (the bank) unless it provides evidence validating the claim of not committing transgression or negligence.
2. Certitude of accusation against trustee: which means a preponderance of suspicion about the trustee’s (the muḍārib) honesty in denial of transgres- sion and negligence because the muḍārib is normally expected to preserve invested capital amounts against loss and achieve profits.
3. Certitude of of the existence of interest in shifting of burden of proof to the muḍārib (bank) in order to protect investors’ funds against loss, claimed by muḍārib or in case of loss of investor’s

Sixth: It is permissible for the bank to donate part of its profit share without stipulating that in the contract.

Seventh: Several bodies are normally entrusted with the determination of responsibility of the bank towards abuse of the funds of investment accounts holders, including the following:

1. Supervisory bodies like central banks, whether a full-fledged Islamic regulatory body or a conventional body with committees specialized in Islamic
2. Centers of reconciliation, arbitration and conflict resolution such as the Islamic International Center for Reconciliation and Arbitration in
3. Auditors as per the generally accepted practices of the According to Accounting Standard No. (5), issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) – Bahrain, this responsibility is considered to constitute part of the respon- sibilities of the external auditor. This task can also be assigned to the Shariah Supervisory Board.

Eighth: Compensation for losses in investment accounts should be confined to actual harm – whether the loss is total or partial – without guaranteeing po- tential profit that has not been realized (opportunity cost) because it is nothing more than an unrealized expectation not actually materialized.

Recommendations

1. Islamic banks should be keen while investing in depositors’ funds to pur- sue methods and mechanisms that would mitigate investment risks and

safeguard these funds against loss. Suitable arrangements in this regard may include the establishment of special funds and the allocation of nec- essary reserves.

2. Muslim countries are called upon to enact laws for the establishment of institutions for deposits insurance or introduce amendments in the ex- isting laws and regulations to cater for cooperative insurance funds to be established by Islamic financial institutions and managed given the rul- ings stated in the Academy resolution no. 200 (6/21) on Shariah Rulings and Standards for the Foundations of Cooperative Insurance.

Indeed, Allāh is All-Knowing.